Posts Tagged ‘Housing’

The Credit Crisis Visualized


An entertaining and creative explanation of what led us into this debacle.

The Crisis of Credit Visualized – Part I (about 7:30)

The Crisis of Credit Visualized – Part II
(about 3:45)

Glad you enjoyed!

8 Reasons Why Housing Hasn’t Bottomed

From the Big Picture by Barry Ritholtz

Prices: By just about every measure, Home prices on a national basis remain elevated. They are now far off their highs, but are still remain about ~15% above historic metrics. I expect prices will continue lower for the next 2-4 quarters, if not longer, and won’t see widespread Real increases for many years after that; Indeed, I don’t expect to see nominal increases for anytime soon.

Mean Reversion: As prices revert back towards historical means, there is the very high probability that they will careen past the median. This is the pattern we see after extended periods of mispricing. Nearly all overpriced asset classes revert not merely to their historic trend line, but typically collapse far below them. I have no reason to believe Housing will be any different.

Employment & Wages: The rate of Unemployment is very likely to continue to rise for the next 4-8 quarters, if not longer. This removes an increasing number of people from the total pool of potential home buyers. There is another issue – Wages, and they have been flat for the past decade (negative in Real terms), crimping the potential for families to trade up to larger houses – a big source of Real Estate activity. Plus, more unemployment means more…

Foreclosures: We likely have not seen the peak in defaults, delinquencies and foreclosures. Many more foreclosures – which are healthy in the long run but wrenching during the process of dislocation – are very likely. These will pressure prices yet lower. And Loan Mods are not working – they are re-defaulting in less than a year between 50-80%, depending upon the mod conditions themselves.

Inventory: There is a substantial supply of “Shadow Inventory” out there which will postpone a recovery in Home prices for a significant period of time. These are the flippers, speculators, builders and financers that are sitting with properties that they do not want to bring back to market yet. Given the extent of the speculative activity during the boom years (2002-06), and the number of foreclosures so far, my back of the envelope estimates are there are anywhere from 1.5 million to as many as 3 million additional homes that could come to market if prices were more advantageous.

Psychology: The investing and home owning public are shell shocked following the twin market crashes and the Housing collapse. First the dot com collapse (2000-03) saw the Nasdaq drop about 80%, then the Credit Crisis of 2008 saw the unprecedented near halving of the market in about a year. Last, Homes nationally have lost about a third of their value since the 2005-06 peak. Total losses to the family balance sheet of these three events are about $25 trillion dollars. These losses not only crimp the ability to make bigger purchases, it dramatically curtails the willingness to take on more debt and leverage. Speaking of which…

Debt Service/Down Payment: Far too many Americans do not have 20% to put down on a home, have poor credit scores, and way too much debt. All of these things act as an impediment to buying a home. At the same time, to get approved for a mortgage, banks are tightening standards, including 1) requiring higher Loan to Values for purchases; 2) better credit scores to get approved for a mortgages; 3) Lower levels of overall debt servicing relative to income for applicants. Yes, the NAR Home Affordability Index shows houses as “more affordable,” but it conveniently ignores these real world factors.

Deleveraging: For the first time in decades, the American consumer is in the process of saving money and deleveraging their balance sheets. After a 40 year credit binge, its long overdue. The process is likely to go on for years, as a new generation is losing confidence in the stock market, Corporate America and their government. Think back to the post-Depression generation that were big savers, modest consumers, who eschewed credit and borrowing. The damage is going to take a while to repair.

When differentiating between real and nominal returns – we refer to returns before and after the effects of inflation (7% growth minus 3% inflation = 4% Real return).

Loan Mods refers to Loan Modifications, typically involving a reduction in the interest rate on the loan, an credit extension, a different type of loan or a combination of the three.

Don’t bet on capital gains any time soon. If you’re an investor, focus instead on cash flow by making more in rent than you pay on your mortgage.

Better a bad job than no job. During good times people quit for better opportunities. Today there’s strong reason to remain where you are at least until employment picks up.

The fact that many are losing confidence is a plus for conservative and patient investors. Stock yields from dividends are becoming the most attractive in over a decade and with fear of opportunity comes an abundance of it.

Invest Like Sam Zell

If you’re don’t know who Sam Zell is, just Google him. He has a net worth of over $3 billion mostly from the sale of his real estate business in 2005 (right before the crash). He started investing in the early 80s, when interest rates were through the roof and home sales through the floor. With his veracious buying amidst a terrible housing market he became known as the “gravedancer”. Here are Sam Zell’s five rules for successful investments:

1. Don’t Just Look At the Financials: Zell says investors should always study a company’s key assets, not just its financial statements. As a private equity investor, Zell has the opportunity to take a hands-on role in a company’s management and operations. But every shareholder should dig deeper into a company before investing. It’s not enough to know sales and profit margins. Always ask: Who are the managers, and what is their motivation? Who are the competitors? Who are the customers? What are the regulatory and/or political hurdles facing the industry?

2. Management Should Always Be Aligned With Shareholders: Zell demands that management be aligned with shareholder interest. At its most basic, this means that management should own large positions in the company’s stock. Still, Zell cautions, “Management that is obsessed with stock price is worrisome. I want them to obsess about the business,” he says. Zell also recommends avoiding companies that have anti-takeover devices. “As someone responsible for a public company, I’m responsible for the public’s capital. If someone comes along and wants to buy it at the right price, why not?”

3. Think Long Term: If you are going to invest in a company, you should always be in it for the long haul. “When you own a company and the company is doing well, then keep going. You don’t make exponential profits by going short.”

4. Be Able To See the Future: Zell always has an opinion about where a company he has invested in will be in the future. This forecasting allows him to assess how much risk he is willing to take in the present.

5. Invest In Companies with Staying Power: Zell requires that companies he invests in have “staying power”–in other words, that there will be continuous future demand for their product. He particularly likes situations where he does not have to spend any money on marketing because consumers already have a need for what is being offered. “The demand for my product should be facilitated by other people’s consumption.”

It’s Time to Revisit The Markets

It’s time to reflect on the predicament of the markets. We ran two editorials in late December entitled “Are You Ready for The “Blue” Year?” and “Some Thoughts on the Markets“. We defined a general outlook for the economy for the year of 2008.

We are constantly reminded that “The more things change, the more they stay the same”, it is far easier to predict what we may see in the future. With that I would like to offer clarity to the confused investor.

Dow/Gold Ratio
The ratio currently stands at 15, with a low of 12.5. Our immediate term goal is 7 with an eventual decline to 3 before the economy pulls itself out of recession.

During the brutal 1973 downturn the Dow Jones Industrial Average fell from 1050 to 570, a decline of 45%! Yet this wrecking fall was cushioned by a counter-rally from 800 to 1000, within 5% of its all-time high. Interestingly gold, during this same period, rose throughout the downturn, from 70 to 195 over the 2 years period. Over 178%!

If I were to rewrite that paragraph but multiplying all 1973-75 dates respectively, it would read as follows:

During the brutal 2007 downturn the Dow Jones Industrial Average fell from 14,000 to 7600, a decline of 45%! Yet this wrecking fall was cushioned by a counter-rally from 10,650 to 13,300, within 5% of its all-time high. Interestingly gold, during this same period, rose throughout the downturn, from 700 to 1950 over the 2 years period. Over 178%!

Obviously, history will not repeat itself, but it sure as hell does rhyme. I believe that the DJIA will push above 13,000 temporarily and then resume its decline to 7600 vicinity. While gold will trend ultimately to the $2000 level by late 2009.

[One may ask based on these calculations, that Dow 7600 / Gold 2000 = 3.8, well above our factor of 3. Nevertheless, it is most probable that gold won’t peak at the exact time that the Dow bottoms].

Thus the prudent investor will seek refuge in some words from our December article.

“The truth is, however inverted it may seem, bad is good, bear is better than bull, bust beats boom”.

This simply means the investor can do phenomenally well by simply paying little attention to the media and markets and instead focus on the short yet profitable buying opportunities that present themselves.

With that we move on to some predictions we made back in December of 2007, results since then and what we can expect going into 2009.

The Economy

“When demand is high and supply is low prices must rise, and if by any means they are manipulated or capped they will rise further in no different a logic than the what lead to most of the current problems in housing

This sums up what we’ve been seeing over the last few months, and it can be expected to continue into 2009. The media will keep calling bottoms while credit and leveraged conditions deteriorate.

“There isn’t much we can be sure of in the next year other than the fact that more volatility and election jargon will be stuffed down our throats

This in my eyes was a no-brainer. Tension was all too high and much of the markets movements were based on speculation rather than solid fundamentals.

“Corporate profits will fall causing either p/e’s to rise or prices to fall as well. Don’t be surprise to see us approaching single-digit ratios for the Dow”

This may have been too short an outlook, however it is expected before markets bottom. It’s not if, but when.

“Expect to see more and more consumers turn to their retirement accounts and credit cards to keep them afloat”

This has been seen slightly and is significantly increasing. Foreclosures have doubled year-to-date and increasing amounts of home-owners are just walking away.


Whether or not [we have a Recession]… expect some sort of ‘flation.

So far GDP has been positive so there is no “official” recession. But ‘flation indeed! Stocks have fallen and since found some relief, while commodities have boomed and since corrected. Yet the investor should not be fooled by this.

Interest Rates

“He [Bernanke] really has no choice… right now he sees fear of recession and it’s his job to cater to it”

With rates lowered from 6.25% to 2%, all Fed Discount Windows were opened and inflows have been supplied to the market, not to mention the bailing out of Bear Sterns.


“The Yen and Yuan seem to be holding up fairly well… As for Switzerland? Yeah, I think the Franc should hold up just fine… for the Loony, Real, Ruble and Aussie Dollar the future never looked so bright”

This was mostly due to a declining Dollar. The Dollar may have now found a bottom and this will be sustained when the Fed turns to raising short term rates. Yet if markets follow any similarity to the 1970s, this rally will be short-lived, with the Dollar testing new lows come 2010.


Interest rates are a major part of the equation. The lower rates go the higher the floor for housing prices”

Any economist would agree that the potential damage has been avoided. Yet we are faced with the worst housing recession since the Great Depression and the results will be felt. Low interest rates cannot makeup for decades of careless credit policy.

“Prices fell a record amount for this year. Buffett says it will continue into late 2008. Others say into 2009. Jeff Saut says prices have to either fall 25% tomorrow or streamline for 5 years in order to reevaluate on an price/income basis.

According to the Schiller Index prices are down 12% in many U.S. cities.

Oil and Gas

“Oil at $150? …I think oil has more to run… many others say $150 or even $200 before the year is out… Expect higher prices at the pump”.

Right on the money! Oil has risen as high as $120 recently. (with gas prices expected to possibly reach $8 a gallon before the year is out). This may be due to the fact that many airline fuel storages, were running low. Acting as a catalyst this replenishing pushed up prices.

“Recessions do decrease demand, but with a decrease in demand comes a decrease in productivity… Wall Street’s assumption of $50 oil… may be way off target”

This can be seen with regard to possible production decreases in Nigeria, and with regard to metals production from South Africa.

The Stock Market

“It’s all in the earnings… there will be surprises… there will be opportunities but I doubt there will be any significant bottoms at least until the recession officially begins”.

Earnings have yet to plummet as stocks are currently down a mere 8% from their highs. Yet while we find ourselves amidst a speculative, yet predictive, short-term rally, we remain within a well defined long-term downtrend. (Is the Dow really selling for 64x earnings?)

Small Banks and Homebuilders

“I say not yet. Will I be wrong? Possibly, but at least I’ll be empty handed on the downside risk, and there is some. I still don’t believe Wall Street has revisited pure unadulterated pessimism. A P/E of 8 doesn’t seem that bad until you recognize its all in the denominator.”

This call is still up in the air. Average bottoms have been presented with indexes selling below book value. They currently sell for 1.3x book.

Commodities and Precious Metals

“When people want food, prices rise”

If I say “Rice, Wheat, Soybeans”, need I say more?

“This will benefit all commodities, as well as gold (The Street gives a $1000 projection). Of course Silver has much further to rise as it regains some historical ratio.”

Talk about psychological resistance! Commodities benefited greatly and Gold went straight to $1000 before correcting strongly. In the case of the Gold/Silver ratio now major advancement was seen. The ratio hovered around 48 before heading as high as 53.5

“In the event that commodities… decline in the short-term this should be seen as a buying opportunity”

We have since been offered this buying opportunity.


“China’s bubble will blow over, but not before the Olympics… After that I suggest you get out, especially if USA Today is announcing record high stock prices.”

China has corrected together with the world markets, but has since regained much losses.

Another great quote from the last article

“The perma-bulls tell you to remain 100% invested in the ‘long run’ as stocks are the highest returning asset class over very long periods, like 100 years… But I have yet to meet an investor that either has a 100 year time horizon or can actually sit through all of the bear markets that occur during 100 years.”
Bennet Sedacca

The Real Bear Sterns Debacle

I always like to think of those times when we come to integral decisions in our day when we are faced with two equal choices, each with its own respective reward and consequence, and must pick between one effect or another. Many times its a matter of social responsibility, sometimes its based on inadequacy of information, and others its the preference of a lesser evil.

The Federal Reserve seems to be at one of these pivotal junctions, caught between a rock – a struggling housing market – and a hard place – price inflation. If it lowers rates for housing inflation levels may surge. If it raises rates, housing will falter.

We are seeing a similar affair developing in the mortgage market. We all know how the mortgage lending business operates. Prospective buyers seek the home of their liking. They then file for a mortgage loan from the bank. The bank will usually offer the loan, following a down payment, give the funds to the seller and document the property as collateral. The buyers agrees to pay the specified increments plus interest. The bank secures its profits off this interest. In the event the owner defaults on his payments and specific actions have been taken and time given, the bank reserves the right to foreclose on the property.

What has happened recently is that many buyers have been unable to make the necessarily payments and have given up their homes. Thus mortgage lenders, such as Bear Sterns, are now left with numerous houses on their books for which they are receiving no income. The ideal option would be to sell these homes at the market price.

But herein lies the problem. The amount of homes are enormous. Just to give you an idea,

Bear Stearns and its affiliates are listed as buyers of at least 53 homes so far this year in San Diego County, California, 48 in Maricopa County, Arizona, and 40 in Cuyahoga County, Ohio, according to a search of property records.

JPMorgan, the third-largest U.S. bank, and its subsidiary Chase Home Lending acquired at least 194 homes this year through foreclosure in Wayne County, Michigan.

Merrill, the third-biggest securities firm by market value, and its mortgage unit, First Franklin, took possession of at least 87 homes this year in San Diego County, California.

Citigroup and affiliates are the new owners of at least 47 homes in Clark County, Nevada.

“Our expertise is in lending money to people to buy homes, it’s not in owning homes” said Chase Home Lending spokesman Thomas Kelly.

Now, if these banks keep these homes then they will risk lower prices in the future that may injure tehir bottom line. However, if they sell at the market it will have a decimating effect on the mortgage-backed securities market when lenders start facing the music and letting property go at whatever price people will pay.

The same can be seen in the CDO market. Being that these bond-arrangements were priced by model of complex mathematical accounting as oppose to market of what investors would pay for them they, in a sense, held onto an asset which they hoped would eventually be priced at a greater value sometime in the future and obviously before they were found to be worth-less (all pun intended).

But, hope is a dangerous thing ladies and gentlemen. It sits in the minds of the complacent and eats away at the future returns of an otherwise potentially profitable portfolio.

Time will tell.

Postponing the Inevitable

Many investors, myself included, find it hard to believe that we are facing an enormous credit crunch of cataclysmic proportions. But although I’m generally an optimist, logic gets the best of me when I read from Bloomberg I read

“Executives at New York-based S&P, Moody’s and Fitch say they are waiting until foreclosure sales show that the collateral backing the bonds has declined enough to create losses before lowering ratings on some of the $6.65 trillion in outstanding mortgage-backed debt.”

What the hell does that mean? Is that another way of saying “We are not going to actually say that things are bad until people can realize they are bad”. (Sounds like the Cisco-pumpers in the late 90s to me).

I read further and the article states

“Homeowners may be delinquent on mortgage payments for at least three months before foreclosure proceedings begin, and the process can be delayed if a borrower files for bankruptcy or fights eviction. Even when lenders repossess a home, the value of the mortgage isn’t written down until the house is sold.”

Key words: Delinquent, Delayed and phrase “until the house is sold”.

Home Sales
Which raises the question. How have home sales been going? Apparently, not so good. Although housing sales have been picking up – a double edge sword – we do have record inventory and the most gullible group of home owners who still believe that this housing “slump” will be long gone come 2008.

But let me ask you. Which homeowners are the ones really eager to sell, the second-home “investors” or the poor couple with no recorded income, who bought a house because everyone else was? I’m not sure but it would seem that it’s the latter.

I have two reasons. For one, Speculators aren’t that stupid. They are the ones who get out as soon as they realize they’ve been had. They know how to get themselves out of the mess that the investors didn’t get into in the first place. Joe Sixpack on the other hand is the one who gets fried. He is the one who ends up mopping up the mess the speculating public left behind – and at a hefty price.

Secondly, besides for trying to make some money Joe Sixpack also needs a place to sleep. Thus, he is far more reluctant to sell than the well-to-do speculator across the street (all pun intended).

Mortgage Bonds
And when will the bondolders really get had?

“Bondholders see a loss only if the price of a house is lower than the loan used as collateral for debt securities.”

In other words, mortgage bonds are directly related to housing prices. When these houses fall, and along with them the collateral used to buy them, the whole house of cards comes crashing down (all pun intended once more).

“What they don’t understand about the rating process is that we don’t change our ratings on speculation about what’s going to happen.”

In otherwords what we have been telling you for ages – by time Wall Street tells you something you should know, its usually too late. For the record, S&P and Moody’s maintained their investment-grade ranking on Enron Corp until days before the Houston-based energy trader filed for bankruptcy.

Oh and if all this hasn’t freaked you out enough to realize that financial assets are in a rut, “National median home sale price is poised for its first annual drop since the Great Depression” Ouch!

The Butterfly Effect
“So,” the simple investor will ask “what does all this have to do with, say, the stock market?”. Well my curious friend, I would answer, you are obviously not familiar with the dynamics of leverage. As debt strategists at Barclays Capital reported “The worry is that this will be large enough to trigger margin calls which, in turn, will cause other liquidations and so on.”

As they say out in the country: “When one falls they all falls”.


Just to give a “You Are Here” in the housing “slowdown”

Questioning the Conventional… in Housing

I always look to the headlines of the most prominent business news sites to get an idea of what the media – and by definition most others – are thinking. I must say that Marketwatch has been relatively conservative over the past few weeks. This may also be due to the fact that Marketwatch displays many commentaries and hence a broad range of thinking (Marketwatch and Bloomberg for example, display the daily price of gold – something USA Today and CNN have yet to do).

Recently, when scanning through CNN’s Money Section I saw exactly what I was looking for. An article entitled “Study says home prices not falling“. This I had to read, and once I did the fun began too.

“The Office of Federal Housing Enterprise Oversight (OFHEO), said its housing price index grew 4.3 percent in the first quarter compared with a year ago.” “Earlier this month, the National Association of Realtors reported the latest national average home price dropped 1.8 percent in the first quarter compared with a year ago”.

So you mean to tell me that there’s actually an organization out there less reliable than the NAR?

“The NAR simply calculates the median sale price for each housing market. The median is a midpoint: it eliminates the impact an unusually large number of extremely expensive or very cheap properties would have on mean averages. The values that NAR comes up with, however, do not take into account differences in the mix of homes sold. If more starter homes in lower-income neighborhoods were sold, and fewer larger homes in expensive neighborhoods changed hands, it could skew median prices lower.”

Well, welcome to the world of averages Les. And guess what? The DJIA and S&P are also averages. Just because the Dow makes 5% doesn’t mean you’ll see a dime. The same bodes for any number – the Savings Rate, Income rates and Gas Prices are all averages. As a matter of fact averages actually tone down what’s really going on. It’s a matter of diversification. When you are averaging millions of homes, the price will fluctuate and hence decline at a much more reasonable and less volatile rate. So when the NAR says that home prices fell 8% this means that the average home could have easily fallen somewhere between 4% and 12%.

“The OFHEO hopes to get a clearer picture of house values by comparing selling prices of specific homes over time.”

So now instead of averaging just the prices we have today, they are attempting to average in also prices of the past. This seems “brilliant” considering that one can also create an index that would account for the $500 Billion in ARMs that are set to adjust over the next two years. The historical return on stocks is 10% but that says nothing about what we can expect for the future.

“The agency draws its data from Fannie Mae and Freddie Mac, the government-sponsored enterprises that purchase mortgage loans”

If you believe such things. Again why again would a “government-sponsored” organization want to announce bad housing numbers?

Then I see the next article “Why you still can’t find a builder

“Home building is in free fall but construction employment is steady, a sign housing won’t tank the job market.”

First of all, let us question this simple yet profound logic. Home Building in free fall means that builders are stopping or slowing their developments, or have already completed them. This is taken to mean that because things have not been bad they will continue to not be bad (double negative). This must make sense.

From what I’ve seen recently, and this is promoted by the fact that New Home Sales were down 8 percent, is that Builders (unlike Existing Home Sellers) have come to realize that this bull market in housing is over. This is due to both lack of demand (Mortgage Rates, Prices) as well as a surge in Supply (even if housing prices fall you still want to finish your plan). This is leaving Builders with the only alternative which is to break even and sell at the pervailing market price. Sellers have yet to catch on.

Now common sense (which by all means has never been common in instances such as these) says that when these developments begin going into the red or complete, the demand for construction workers and builders will be substantially diminished. Employment is thus a lagging indicator not a leading one. Bear in mind that the employment numbers aren’t due till tomorrow.

“Still, experts in the field suggest several reasons for the strength in construction employment despite the housing downturn. Some of it is due to the shift of workers to non-residential construction jobs, some of it is due to employers not wanting to let go of skilled craftsmen in case the homebuilding market picks up…”

“Non-residential Jobs” we’ve always had these, so why should any event distort them. “In case the homebuilding market picks up…” once again we see a decision being made on sentiment and not on the facts. This downturn may last years. So why again would any employer be paying salaries to workers that are for lack of a better word “unemployed”?

“And part of it may be due to the large use of immigrant labor in the construction industry. If contractors and subcontractors were not reporting off-the-book employees to the government during the housing boom, their absence now won’t be missed in the figures.”

But a few lines later it explains this very phenomenon together with modern day American capitalism…

“The Labor Department estimates that 25 percent of construction workers were foreign-born in 2006, up from 23 percent in 2005.”

We’re not doing a quarter of the work! Immigrants are. David Kelly, an economic advisor to Putnam Investments, who makes himself sound like an idiot then says…

“All construction employment estimates are missing many of the illegal immigrants working in the sector, and that therefore the gains in employment were probably greater than reported during the housing boom, and the drop of employment now is also probably greater than the numbers show.”

So 1-1=0. Very good Mr. Kelly. You are now certified to be an economist. He then reclaims his sanity by noting…

“It can take a while for builders and subcontractors to start to cut back staffing when there’s a downturn. Seiders said builders will often try to cut hours before cutting staff.”

No comment because we noted this in the beginning of our article – Employment is a lagging indicator.

“You try to keep things rolling along as long as you can. You don’t want to lose your best carpenter.”

This sounds all too familiar to the “Hold those Yahoo stocks at $400 as long as you can. You don’t want to miss the next surge.”


A Mistake in Action or in Reason?

Someone explain this one to me. We all know that bond prices and yields are inverted. That means that investors buy bonds, usually on economic weakness, yields lower. Similarly when the economy is doing well, investors sell bonds, thus raising rates.

Bloomberg reports “Treasuries fell, pushing yields on benchmark 10-year notes to the highest level since January, on a sign of housing strength… after a government report showed the biggest rise in new-home sales in 14 years.”

But this news is bad! After stagnant home-sales over the past few months its about time we get some action. But this means that some buyers, impatient and reluctant to wait for lower prices, have thrown in the towel and decided to buy anyway. Now although they may not be categorized as investors, they are nonetheless not that stupid. Look at the numbers: Marketwatch reports Median sales price off 10.9% in past year, Biggest drop since 1970! (emphasis our but should be theirs). Existing Homes sold for a 2% discount. Now wonder there are suddenly so many buyers.

[As to why the Existing Homes are lagging New Homes, Adrian Ash from Bullion vault explains that Builders are smarter than Buyers. “The only way U.S. Builders can shift unsold homes is to discount. Existing homes, in contrast, won’t sell – because the discounting has yet to begin…”]

So now tell me. This economic report is supposed to be good news? A reason to sell bonds and buy what? Houses? Maybe Bloomberg has it wrong. It could be these bond investors are off to cash in on something altogether different (and I sure as hell hope it doesn’t require a mortgage to buy or contains the words “Private” and “Equity” in the same sentence).

Oh, and I just got word that the reality show “Flip This House” was a setup.

I repeat over the words of Bill Hampel, chief economist for the Credit Union National Association. “The bottom of the housing sector is not upon us.”

“FREE Seminar – How To Buy House with Zero Down”

It takes one to know one… or at least that’s what they say.

So after you’ve booked one of these “Wealth” seminars, traveled so far, paid outlandish prices for books and tapes and even more for memberships, John T. Reed tells us what has become of many of these “Get Rich Quick” gurus.

  • Albert Lowry, author of “How You Can Become Financially Independent by Investing in Real Estate,” declared Chapter 7 bankruptcy in 1987.
  • Craig Hall, author of “Craig Hall’s Book of Real Estate Investing,” declared bankruptcy in 1992.
  • Bill “Tycoon” Greene, author of “Two Years for Freedom,” was convicted, fined and sentenced to prison. (He later escaped from a minimum security prison and is believed to be living in England.)
  • Tony Hoffman, author of “How to Negotiate Successfully in Real Estate,” filed Chapter 11 bankruptcy for his company in 1986.
  • Wade Cook, author of “How to Build a Real Estate Money Machine,” declared Chapter 7 bankruptcy in 1987 and 2003.
  • Dave Glubeitch, author of “The Money Game,” declared Chapter 7 bankruptcy in 1987.
  • Dave Del Dotto, author of “Cash Flow System,” was charged by the FTC with misrepresenting products in 1993. He filed Chapter 7 bankruptcy in 1995.
  • Charles Givens, author of “Wealth Without Risk,” was successfully sued by a former customer for giving bad financial advice. He filed for Chapter 7 bankruptcy in 1995. He died pending trial.
  • Sonny Block, author of “Inside Real Estate,” was indicted in May 1995 by a federal grand jury for fraud and fled to the Dominican Republic to avoid prosecution. He was eventually deported to the U.S., but died pending trial.
  • Ed Beckley, author of “Million Dollar Secrets,” declared bankruptcy in 1987 and was sentenced to federal prison for wire fraud.
  • Robert Allen, the author of “Nothing Down” and “Creating Wealth,” declared Chapter 7 bankruptcy in May 1996.

I guess it’s safe to say that speculating on housing is out for now, at least until the line of books in the library changes to something such as, say, commodities.


The Real Estate Roller Coaster

Towards the end I just couldn’t stop laughing. Oh, and if you own a home that you just bought with the intention of flipping… I’m sorry.

A special thanks to Barry Ritholtz from
The Big Picture.

A Bubble of Liquidity
By Yours Truly

Last December we wrote an article on the concept of financial “Bubbles”. We explained simply what they are:

A state of booming economic activity (as in a stock market) that often ends in a sudden collapse”

We’ve seen many bubbles come and go throughout the centuries. But they never cease to amaze me. Not the bubble itself, but the general sentiment that generates one.

Rock Bottom. In order to create a bubble you must first create an image, a promise, a vision that has thus far been unfruitful. Investors see its future risky and complicated. This is reserved for keen contrarian investors who look for unloved, undervalued opportunities.
Think stocks and financial risk in 1980.

Phase #1. The Denial Stage. Next the buying begins but only for very few. Many have no idea of what is being bought or what gains have been made, nor are they interested in asking why. No news, No hype, No record highs. Just consistent, gradual gains. The way many value investors like it.
Think stocks in the early 80s, with the Dow breaking properly over 1000 only few had been able to buy below that.

Phase #2. The Speculative Stage. Word has already begun to leak out. Word on the street shows life and a simmer of hope presents itself. A few daring institutions and small investors buy in small quantities, while newspapers show “dodgy” ads on the back page advertising the next “Secret To Millions”. All said, the wave comes and goes, few buy in but later sell disappointed by its false promises and record highs come into view and then disappear again. For the most part the “general public” sits on the sidelines.
Think Stocks after the Crash of 87′ when anyone who held anything of the sort was easily convincing themselves that the end of equities had truly come.

Phase #3. The Bubble. The third wave of speculators begin to buy in. Usually institutions interested in making a quick buck off of an easy trade. But before long, speculative margin traders, smaller institutions, momentum investors and every Tom, Dick and Harry is on-board.
Think Tech Stocks in 1997-98 when even sharp declines in the Dow could not waver the people’s optimism.

Phase #4. Euphoric Blow-off. Speculation becomes most rampant and the wave attains full strength, easily convincing any rationale or emotion that the laws of economics have become secondary and that good things do last forever.
Think Cisco even after the Dow was in trouble when shareholders were still buying in at over 100 times earnings.

The Pop. Like a raging tidal wave the trend has drawn every last sucker into the fold, it then begins to give. Easily at first, the in jolts and finally with the ultimate crash that sends every man, woman and child running for cover – with or without their positions.
Think the day when the falsies of man came crumbling down together with the stock of their first love, Enron.

Let us adjust this to nowadays. I remember that in late 2005 Steve Forbes wrote in an editorial regarding the housing market that bubbles can only occur when people are not aware that its a bubble. Well we indeed did see housing prices rise for about another year before finally showing any sign of a slowdown.

So where are we? Where aren’t we looking that many should be. In my humble opinion the answer is simple: Money. The greatest investor of our time is known for his famous saying “Be Fearful when other are Greedy and Greedy when others are Fearful”. We live in times when the average man is definitely greedy. Market-Beating Returns, Day Trading, Speculation, Inflation and a fine lack of an understanding in the concept of an o’ so important word: Risk.

Many analysts in the stock market, even after the sell-off last month now see no chance of a major crash, nor do economists see any chance of a recession.

But let me tell you, It’s far more probable than Ben Bernanke and Henry Paulson are telling you, and they know it. The United States and most of the world now faces a Credit Crunch that many have not seen probably since the Great Depression. Few nations will be saved.

We live in a bubble of credit, in an age laden in debt – Public as well as private, held up by a bubble of liquidity and easy money, supported by a group of baseless appeasing bureaucrats and heading into a deflationary cycle (credit deflation) that will either make the nation’s currency worthless (through monetary inflation of its supply) or its inhabitants broke (through defaulted loans and strengthening qualifications for re instituting new ones).

We live in a world of misleading promises and uncompromising leverage and vulnerability. Investors have purchased stocks that trade for 20 times their earnings, the unemployed bought homes with exotic mortgages they could never afford and credit cards and paper IOUs have replaced the currency of exchange.

We live in a bubble of credit, in an age laden in debt – Public as well as private, held up by a bubble of liquidity and easy money, supported by a group of baseless appeasing bureaucrats and heading into a deflationary cycle (credit deflation) that will either make the nation’s currency worthless (through monetary inflation of its supply) or its inhabitants broke (through defaulted loans and strengthening qualifications for re instituting new ones).

We live in a world of misleading promises and uncompromising leverage and vulnerability. Investors have purchased stocks that trade for 20 times their earnings, the unemployed bought homes with exotic mortgages they could never afford and credit cards and paper IOUs have replaced the currency of exchange.

When it will implode nobody knows, but when it does, and implode it shall, those that doubted the very laws of nature that created their fortunes will grasp the sincerity of its force when it follows through on those very laws.

What to do:

Rule #1 – Minimize Debt. Before investing another dime use all monies to pay back as much of your credit cards and mortgage as possible.
Rule #2 – Cut back on spending. Don’t buy things you can’t afford with money you don’t yet have.
Rule #3 – Just Save. Many markets are far too risky to be buying into right now (yes, even in the long-term). Keep holdings in safe, hard assets and in short-term treasuries.

And remember… in Credit Crunches every extra dollar that has been produced in vain will ultimately be sucked dry.


Is This Like I.P.O. Fridays?

The Grass is always Greener on the Short Side

Updated: Feb 27 at 7:27 pm

What a day its been do far and a Great day to be short some.

  • The Dow Jones Industrials Average fell 3.3% placing it -2% for 2007. Nasdaq fell almost 4%. There is much speculation as to whether this will trigger a comeback rally or future selling (just take a look at the video section on Bloomberg). Whats this? “Japan’s Nikkei 225 opens down 276.31 points…” I reckon we’re in for more selling
  • Recession Fears. It seem that Big Al’s comments meant something after all. I don’t think that the markets will be recovering that easily. We will probably see either further declines or continued sideways action around current levels as we have seen over the past few weeks.
  • Asian Stocks may be the cause for the sharp sell off in equities in the U.S. markets. Chinese stocks fell 9% yesterday.
  • Precious Metals got hit hard but then bounced back fast. If this is the recession we’ve been looking for we still await to see how the PMs will react. So far they’ve been modestly unaffected. IMO, buying in now is still speculative as I expect a broad decline to be reflected in the metals as well. As Warren Buffet says “Holding cash is painful, but not as painful as doing something stupid”.

Here’s what Jim Sinclair had to say

“When I was asked yesterday in Toronto during the informal question-and-answer session what would happen to gold when and if the equity market broke, I answered, ‘At first the equity market breaks will bring in temporary sellers of gold. However, quite quickly thereafter and most certainly when the U.S. dollar also gets hit, gold will steady and start its move to all the angels”.

Darn Right.

  • Bonds are being bought silly by someone who’s probably busy selling shares. The yield for a 10-Year Treasury currently stands at 4.56%.
  • Housing numbers came out again today. Amazing though how they’ll always mention the part how sales are up, but never the follow up… that prices for houses are falling. This time prices fell from 218,000 to 210,600 – a decline of 3%. Maybe the recent sub-prime havoc is knocking some sense into potential sellers.
  • Energies have also come back strong, with Oil toggling around the $62 mark and Natural Gas at $7.53
We shall see… More to come.


Housing the Next Recession

With courtesy from The Big Picture Floyd Norris brings to our attention a unique statistic on Housing and Recessions

Here’s another way to look at the housing start numbers: Take a three-month moving average of single-family starts, at a seasonally adjusted rate. That smooths out some of the weather-induced volatility.

By that measure, starts have now fallen for 11 consecutive months, and are off more than 30 percent over that period.

Here’s a list of the only four other times (going back to 1959) that the figure fell for 11 consecutive months.

1. November 1973 was the 11th month. A recession began that very month.
2. April 1980 was the 11th month. A recession began in January of that year.
3. November 1981 was the 11th month. A recession began in July of that year.
4. February 1991 was the 11th month. A recession began the previous July.

These days, almost no one thinks a recession is looming.

January 2007 was the 5th such time we have seen this phenomena — and all four prior such instances led to a recession.

Housing and Recessions
Floyd Norris
NYTimes, FEBRUARY 16, 2007, 4:12 PM